Contracts, Markets, Power and Institutionalism - Explaining CEO Compensation

Abstract: Chief Executive Officer (CEO) compensation is an issue of great public concern, one which involves acute stratification, and is a question at the heart of theoretical and social characetarizations of the contemporary capitalist system. Yet is is an issue around which there exists no empirical, and to a lesser degree, no theoretical consensus. The field has for a long time been dominated by economic theories, which however have been unable to explain the shape of contemporary CEO compensation. This paper traces the foundations for the dominant theories, agency theory based on contract theory, and examines their explaining power in the light of transaction cost theory as well as theories of power and resource dependency. In order to create a more comprehensive framework for explaining CEO compensation a breed of institutionalism, drawing on the logic of appropriateness, is introduced. The conclusion is that agency theory by itself is poorly suited to explain the shape of CEO compensation while it does highlight the tension between delegation of authority and monitoring. Other ways that market processes are usurped are discussed, such as network theory.